Overview of fractional reserve banking | The monetary system | Macroeconomics | Khan Academy
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Big picture of how money enters circulation and how lending can increase the money supply
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Learned more about how money works in 8 minutes from this one video than from all my schooling years combined.
Yeah because if they taught you this in school it wouldnt take long to realise how crooked the system is.
What type of 3rd rate school are you going
@@subhammandal5531 it is literally every school
@@ShreyGupta874 It is literally not. I can show you my macroeconomics text book. The Federal Reserve is not mentioned once.
@@marcusmaynard1526 thats exactly what im saying, schools don't teach us this, i was replying to someone else who was saying only bad schools don't teach about this
Who's here after the Leeds v tate interview?
Lmao knew other people were gonna be here after that podcast 😂
@Bhaskar nah I'm thinking it's just us at least for now. What tate said was right: 100% watch. 98% of people don't follow up
@@The_G_Edits fr
aye
On god man i went to newest comments on the biggest video on the topic and theres 5 of us here
Thank you - I have been trying to understand this concept and this video could not have been more helpful!
You taught me all this in few videos.what my 2year course couldn't clearly. You are truly revolutionary in learning space. Hearty thanks sal and team
No. Thought it would be better to build up to it. Also separate the conversation of the weaknesses of central banks and fractional reserve banking from the explanation of the Austrian Business Cycle Theory.
excellent communication, love the use of the pictures, helped alot!
Great Job and thanks for making it so simple to understand. Keep up the great work!
🎯 Key Takeaways for quick navigation:
00:00 💰 Money is created in market-based economies through central banks, which have the authority to print and circulate money.
00:58 Central banks can create money by printing physical currency or electronic money, and they often buy safe securities like government debt to put money into circulation.
03:25 Fractional reserve lending allows banks to keep only a fraction of deposited reserves and lend out the rest, creating a multiplier effect on money in the economy.
06:17 Checking accounts and the use of checks enable money to remain within the banking system, facilitating transactions without physical cash.
08:12 The amount of money in circulation is influenced by lending confidence; more lending expands the money supply, while less lending can cause it to contract.
"The amount of money in circulation is not in the central banks control, or not directly"
The central bank can adjust the supply of money by adjusting the cost of money(the cost to borrow money) via the interest rates. They can also DIRECTLY effect the money supply by buying or selling MBS(as they are currently doing today).
Extremely poignant, given today's current economic climate.
Except they only affect the interest rates of bonds. If the markets are bullish, they can't stop it. They're no longer the only player in town.
they don't adjust the supply of money by adjusting the interest rates. they adjust the interest rates by adjusting the supply of money. The interest rates are depending on the supply and demand curve. The Fed doesn't have a meter to control it directly.
Really good information here, thanks very much, we were recently asked to do a rap about this topic on our channel and I used this as one of my sources to research!
"market based economy... central bank"
Isn't the central bank the antithesis of a market based economy?
Bitcoin creates a true market based economy
no
Sean Williams yup
Welcome to Austrian economics. Central Bank is against market economy
Incredibly helpful!!!
Great video, thanks for sharing
Really good explanation
Why are people so quick to saying fractional reserve banking is a scam? It is the reason we enjoy the standards of living we have today. I would say fractional reserve banking isn’t the problem. it is Neutral, like fire. The issue lies not in its existence, but rather how we manage it!
It is private. As the saying goes, it is no more federal, than federal express :)
its been over a 10 years??
hope you're doing good!!!!!
lol good thing I found the Khan, I'm an econ now.
Thank you for putting it simply - now I finally understand!
@selvsmordspilot the CEO and board of directors are not appointed by congress and or the president though are they?
Because there’s also the interest created when the bank loans money out, it creates a system based on debt where only the bank can win, right?
do debit cards function the same as cheques in this scenario?
This AP should be taught in every school as a mandatory subject.
In every school, college, country. It is absurd that the majoriy ignores the critical subtle mechanisms that govern our world. Ignorance will always produce manipulative leaders and misguided populations
We hope more people access these free resources to be informed and empowered!
Did someone already mention that this video is second in "The monetary system | Macroeconomics" playlist? IMHO this could be the first and the current first video "Weaknesses of fractional reserve lending" the second?
Money is currently a debt bearing instrument. That is why we will always have growing debt in the current system or you will end up with a depression in which case the creditors will buy up assets for pennies on the dollar or foreclose. Gotta love this f*cked up system!!!
We are in Bondage to the Central banks. Gotta love it!! Live it up suckers!!!
Banks do not lend out reserves, they create their own credit/dollars to lend. The Fed creates the reserves, but banks do not lend any part of it.
Right but they only have to hold like 10%. The rest can be reloaned. If all the debt were payed… there would not be a single dollar in circulation because Debt=Money and Money=Debt. When you factor in interest then you start to see why this system is designed to rob Americans of generational wealth, land etc. it’s literal fraud and needs to be abolished and everything acquired by the Fed seized. It’s important to note, this system targets EVERY AMERICAN. Once all the land is acquired… they plan to claim those famous birth certificates. Digest and think on this a minute….
well, you have a point there. It would be very hard indeed to know things without thinking or studying. :)
its been over a 10 years??
hope you're doing good!!!!!
wonderful
Step-1: First the law. In the beginning there were gold coins. Then there were certificates for the amount of gold. Those certificates were called "promissory notes", aka negotiable instruments, aka bills of exchange, aka money. The courts ruled that a note assigning an UNCONDITIONAL PROMISE TO PAY is money. The banks took it a step further.
Step 2: When a person goes to a bank to borrow money for a house the bank provides the person with a promissory note. The person signs the promissory note. The bank takes that promissory note and deposits it in a TRANSACTION ACCOUNT. The account is arrange the same way your banking is arrange with debits and credits.
Step 3: Each time you make a mortgage payment money is deducted from the principal /interest “owed”. When your payment is completed the accounts zeros out and the books are balanced. The promissory note becomes worthless - completion voids its value.
Step 4: This promissory note money is called ENDOGENOUS money by some economist. Some groups call it DEBT, other people call it currency. Some people like to hide the bank's exploits by claiming that it is debt and not money. But that is irrelevant because we are looking for the effects of this money in society. It behaves differently than FIAT money in that it loses value once the note has been paid off. By far most of the money we use in our economy is this endogenous money. Last year there were 2.0 trillion dollars worth of paper money, but approximately 17 trillion dollars worth of this endogenous money.
What I am not clear about is what happens to the house once the Federal Reserve balances the commercial bank loan (Quantitative Easing). I don't see the Federal Reserve selling houses. I dont see the government selling the foreclose homes. I don't see the taxpayers getting the value of their money back once they bail out the banks. They claim that the money goes into reserve accounts. Are commercial banks getting free houses?
People say all kinds of things but they never provide me with research or study on how the “citizenry” get back the value of these homes they just bailed out.
Nice enjoyable drawing
So basically… it’s that cash that makes the system vulnerable… so the cash needs to go an de CBDC’s will be introduced to get full control over everything and everyone…
If depositor of money wants to take 100% money where bank lended 90% of his money to another? Is it possible? Not physical money. Atleast virtual in bank transfers? So using this mechanism can I form multiple banks and deposit or lend in other banks I have and withdraw 10x more money?
I'm not saying this is incorrect, but I think it's slightly misleading. It's giving the impression that the bank has to keep a certain amount of deposits in reserve and lend out the rest. In reality, the bank can lend out *way more* than it ever received in deposits. Which you do hint at in the rest of the scenario but it's not made explicitly clear.
Does fractional reserve banking apply to all types of accounts at a bank or just a certain ones just curious btw thanks for the video
My understanding is it applies to any account where a customer deposits money into the bank. That money is then lended out 9x. Each time the money is lended to a new customer, the deposit from that loan becomes a new deposit, thus creating new money in circulation.
More and more people know about this.
Bankers will try to liquidate cash to prevent bank run.
is this system functioning in india also? or only in the USA
exists: X dollars
Banks: gives out X dollars and asks for X+% dollars back
everyone else: there is nothing strange about this at all.
That's why interest makes no bloody sense no matter how you put it
Time preference is a thing smh
How much money is created over time as a consequence of the printing of one dollar?
So some deposits £10 pound, he withdraws £2. The bank loans out £8 and there is £8 of credit/debt in the accounts. The banks then use interest rates for that person to pay his given debt?
A even more interesting question is: who have jurisdiction over payment?
Correct me if I'm wrong.
So basically the banks are creating money out of nothing and decide how much they will create depending on certain situations. So let's say I deposit $100 in a bank and the bank reserve ratio is 10%. The bank keeps $10 dollars as vault cash and lends $90 out to someone. The bank then creates $90 of credit and puts it in my account. Therefore there are now $190 in existence.
That's pretty much it..lol
But there is not enough money to cover the outstanding debt? Correct?
+laura conway Well that is if our debt owners keep all of our money that we use to pay back the debt. The debt owners must buy and purchase their wants and their needs so they will have to put that money back into the economy. So it is technically posible to pay back all debts but there is more debt than money.
***** Debit cards.Even if the bank only has only $10 dollars of cash in my bank account, I can still spend $100 using my debit card because I gave them $100 of cash. There is more digital currency than cash.
The 'money multiplier' is a proven fiction. Banks create pseud-loans as pseudo-deposits, irrespective of credited deposits or reserves held. Neither the Fed or the banks possess the legal authority to create money, and they don't. What they do create is asset-backed, debt based PRIVATE credit in the form of crediting deposit accounts. The debt based private credit, denominated in dollars, generated by the Fed and the banks is not a U.S. legal tender money as there is no law anywhere that designates it as such. In point of fact, there is no law that even recognizes as being a money of any type, and the only laws associated with it resides in the contracted debts incurred with its use. Currently, there are $1.48-Trillion in U.S. legal tender money in circulation around the globe, with abut $280-Billion of that in circulation within the U.S. and of that, $71-Billion is held in bank vaults. That $71-Billion backs the $1.38-Trillion in checkable/demand deposits and that, is the reality of fractional reserve banking.
carl-random-thoughts.blogspot.com/
the Frog
What or who gives the central bank the authority to print money... How can it be of any value?
Can someone please tell me who on earth are these people that own these securities which are bought by the federal reserve bank?
How is there 6 dollars between the 3 banks if the 2 dollars from the first bank is moved the second leaving it with 1 dollar. The second bank lends out 1 dollar out of its 2 to the third bank. By your explanation there would only be three dollars in circulation.
But what if that check gives the apple vendor the right to withdraw $3 instead of $1 and the bank did lend out $2 and keep the $1 what would happen when the apple vender want to withdraw that money he would find insufficient funds what would the bank do now ?
END THE FED
A central bank has a monopoly on the money supply which is only possible with govt. The Fed is a creation of congress, yet maintains some independence like it is private.
FedEx was not created and given a monopoly of mail delivery by congress. It is private and competitive. The Fed may be considered "private" but government gave them the monopoly on the money supply and picks the board.
The economic issue against the Fed is the fact that it is central banking, not whether public or private.
So it’s basically interest??
We are now at 0% Reserve Ratio Requirement effective 3/26/2020...
Big respect for Salman Khan for what he has done in the field of education - it's really astounding, however he does *not* have clue what fractional reserve banking is.
1. Money does not have an intrinsic value - goods and services have, thus no government needs non-government, profit-driven body to print money, because every government can simply print the money itself!
2. Bankers are not wiser than governments and neither they are more trustworthy especially as banking is the most subsidised business activity:
- bailouts
- deposits guarantees by governments, that is by us*taxpayers*
3. FRB is based on *belief* that the customer will *not* withdraw cash in overwhelming majority of cases, around 95% to 99%, thus a bank can show to customers pretty much any balance they want to because only when a customer withdraws the money we realize whether or not a bank is solvent.
Please correct these mistakes Mr Khan.
your reserve percentages are wrong, in most cases the reserve is 10% and the bank can then duplicate the other 90% that it gave out as a loan, therefore this is grossly mis-informing by underestimation.
I don't understand what you mean by buying security or bonds?
bonds or security is a certificate that the government is owning you and they promised to pay it AKA they borrow your money in fancy word.
If everyone decided to try and remove 11% of their money, on the same day, you'd have anarchy.
Random? Who created the Fed and granted it a monopoly on the money supply? Who picked Bernanke and nominates others of the board of the Fed? Who gave the Fed a dual mandate? Government.
I understand how fractional reserve banking works. It is the same way regardless of how you label it. You write as the Fed works different than the People' bank of China or the central bank of India, etc. Again, the common economic criticism is central banking, not whether you call it public or private.
Fed is owned by the banks. The perfect scam
If money is lent, can’t the interest rates act as the money has “never left” the bank?
So this is what we're all taught, more or less, but I have read, (and seen lectures) about how this is not how money creation really works...supposedly banks create money themselves whenever they make loans.
The claim, which seems to have tons of support, is that if a bank wants to make a loan, it simply does, out of thin air, and creates a deposit for the loanee in the process, thus creating money themselves. Basically, banks create deposits, with their loans, and this is how most money creation works. Seems crazy and not sure I get it, but sources are out there claiming this is true, even the Bank of England in an official paper!
Brian Lopez Yes, but then they have to periodically settle their reserve requirement. The end result is basically the same.
This is half true. They don't create money out of thin air, because they can only lend money, if they have money in their vaults. But in practice, new money is created, because the money you deposited in the bank which was lent to someone else, is still registered in your account ready to be withdraw.
Rick Apocalypse They don't check the money they have in their "vaults" when making loans. It's not as though a depositor's account is linked to a borrower's account; they basically just add an entry to a ledger and settle discrepancies later. If they make more loans than they have deposits to meet reserve requirements, they borrow money (usually from other banks but they can also borrow from the Fed) to make up the deficit.
Nanofuture87 I know. It's just that "create money out of thin air" sounds like they are printing money when lending it. Like their loans weren't backed by anything.
Now that i think about it, most of their money is digital, no one walks around with fat stacks of cash...The way it works should be banks moving their physical money from one bank to another.
We would all assume we don't get to see the dirty work from the movement of hard cash but is there a possability banks just give other banks "digital" credit.
That would be insane, who polices the banks anyhow...banks?
This is why hyperinflation occurs after 1-2 years of excessive money printing by central banks
GG america
So basically, bonds and securities create money because the government buys them with newly printed money.
I don’t understand how, with this explanation of fractional reserve banking, does “new” money get created when banks lend? Person number 2 might have 2 dollars in the bank, but they also owe 2 dollars to the previous bank.. So where’s the “new” dollar?
How does this differ from the following scenario: You lend $10 to a friend, who lends that $10 to another friend, who lends that $10 to another friend. No new money has been created.. The last person effectively owes the first person $10 and everyone in between technically has a payable and a receivable that net to $0.
The gold standard isn't some magic that solves the problem. People still need to be responsible.
if u have been watching Khan's videos, done some serious studying n thinking on ur own, u'd know the gold standard isn't the answer.
Please explain why you think that.
Dude needs a rhetoric class.
6:30
When he said the Apple cost $1, i first guffawed. Then i realize he was talking about an actual apple.
Stupid is...
In “Occupying Chairlifts” a simple rule tweak on inheritance ends up changing the direction and purpose of modern human life! Here’s a fair way to transition forward to where we’re rewarded for cooperating and creating instead of competing and conquering.
It's something specific we can demand. If this isnt the best answer, at least we’re thinking about what might be. Are we really just this close to having it work right?
Oh yeah, it's a Ski movie! “Occupying Chairlifts” on CZcams!
The total amount created through the fractional reserve for x="percentage that has to be kept" is (1/x)-1. In the case of a 10% fractional reserve, that means 9 times more money than without the system
And that all goes into the hands of bankers who don't have to work to get that money, great
How can one keep a straight face describing fractional reserve. You dont see the problem with this?! 😮 Its very different if one decides to risk their money to invest in something.
does that mean, that an emitter could "buy" everything in country (even in out of borders), cause he can emit that much money and buy stocks and securities and no one is controlling and limiting it?
Yes.
@@joshuaharrell554 No. 5th amendment doesn't allow it. Plus you can't buy something that isn't for sale.
IT PRINTZ MONEY!
thats cool :D
Andrew tate sent me here
hahahahah
khan, Is this how it really works?...from you diagram it "appears" that a bank gets 3 dollars, lend 2 out and then holds one dollar in reserve based on your dotted line...BUT rather, shouldn't that "dotted line" be 9 times higher than the stack of 3 one dollar bills (9:1 )? I think the name of the game is confusion when it comes to "how money works"...
Well, it’s 9 times IF the reserve requirement is 10%.
From an economist - Bill Mitchell.
"The conception of the money multiplier is really as simple as that. But while simple it is also wrong to the core! What it implies is that banks first of all take deposits to get funds which they can then on-lend. But prudential regulations require they keep a little in reserve. So we get this credit creation process ballooning out due to the fractional reserve requirements.
Well that is not at all like the real world. It is a stylised text-book model which isn’t even close to how things actually operate. The way banks actually operate is to seek to attract credit-worthy customers to which they can loan funds to and thereby make profit. What constitutes credit-worthiness varies over the business cycle and so lending standards become more lax at boom times as banks chase market share.
These loans are made independent of their reserve positions. Depending on the way the central bank accounts for commercial bank reserves, the latter will then seek funds to ensure they have the required reserves in the relevant accounting period. They can borrow from each other in the interbank market but if the system overall is short of reserves these “horizontal” transactions will not add the required reserves. In these cases, the bank will sell bonds back to the central bank or borrow outright through the device called the “discount window”. There is typically a penalty for using this source of funds."
Whos here from Zeitgeist: Addendum?
lol, dude, how do you know ... like everything?
he studies and thinks
Dear Khan, with all due respect, and it is the utter most. Can you please update this video using the proper terms and language. I am not a conspiracy theorist, and the banking system is actually very confusing. The word 'money' for example is incorrect terminology. Verbatum
Burton's Legal Thesaurus, 4E. Copyright © 2007 by William C. Burton. Used with permission of The McGraw-Hill Companies, Inc.
"MONEY. Gold, silver, and some other less precious metals, in the progress of civilization and commerce, have become the common standards of value; in order to avoid the delay and inconvenience of regulating their weight and quality whenever passed, the governments of the civilized world have caused them to be manufactured in certain portions, and marked with a Stamp which attests their value; this is called money. 1 Inst. 207; 1 Hale's Hist. 188; 1 Pardess. n. 22; Dom. Lois civ. liv. prel. t. 3, s. 2, n. 6. "
Current bank notes or credit/debt which you are referring to are as such. People no longer get "money" as current bank notes only represent a commitment to pay or debt.
Thank you.
Quite honestly, I think you focused to much on the central bank in your austrian video. I would like to see more talk about mal-investment,easy money and the austrian views on the resulting credit booms and busts. Less talk about the "human error" of a central banker.
🤑
That's just scummy, right? If they're gonna print out money it should go to every user of the currency depending on what they already have and let them spend it how they will. The banks are basically getting money for nothing. It should change as we move towards an electronic currency system.
The electronic currency system I believe you’re referring too is central bank digital currency, and trust me that’s going to make it worse
If these facts aren't upsetting you, then you should probably watch the video again
This video is wrong in the sense that it says the reserves that central banks give to the banks then leads that bank to leand in the economy. that is not the case the reserves are a special money which only gets used between central banks and commercial banks. Banks are not limited by reserves to create more money. You can give them you asset and they will create deposit on the balance sheet against this asset of your in your name.
Essentially fiat currency aka paper money holds as much value as the boogers in my nose
I do not understand this. As soon as he said "they buy securities" I have no idea what that is even when I look it up. It just doesn't make sense. Just sell real things
I chucked when you said, 'Just sell real things.' 😂 Putting it shortly these treasury bonds that are sold are sold by the US Department of Treasury that are stores of value which is what money is. Money is a complex matter because being a store of value and a means of exchange it has no practical or real life value no matter what it is even gold. We would exchange goods and services directly ie. barter if it was easier. So money is a creation derived from our human needs. So The Treasury Department sells their means of exchange bonds for the Federal Reserve's US dollars. The Federal Reserve is the US's private bank that supplies money into the economy. I hope that helps.
They trade contracts or should I say barter a legal document in exchange for legal tender which is required but should only be allowed to the central bank and put commercial banks a restarin of 90% or even 100% reserves to stop them from going nuts with speculation
second
zeitgeist addendum documentary---is this explaining a propaganda ?
Its the same method to pump up the stock market. Just take out loans to buy shares. to pump up share value. Total currency in circulation is still only less than 2 trillion.
This is a lie. A dollar has a serial number be it real or digital. So the real way this works is the bank deposits this $1 overnight in the federal reserve bank and they give them $10 back. Serial numbered digital or paper money.
Well my dear friend ..... Gold standard had been the correct answer for almost 200+ year's right from 1770's up to 1970's .... there was less then 20% inflation through that period .... i know that in modern scenario it's difficult to put gold standard back on because the total amount of money supply is many times larger then actual physical gold out there ... BUT WE GOT TO DO SOMETHING ABOUT THAT
With your understanding of language and terminology, I hope you have crypto
It looks like “Ponzi scheme.”
it is.
2023 -bank crashes brought me here
This isn't a big deal. People shouldn't be so upset by it. Money can be created out of noting, it can be worth nothing: as long as it is used to create value, which it does. It allows us to make food and ipods and other things that people care about.
Insaumnia right. Money is just a piece of paper we put value to. Gold is where the real value is.
your opening sentence is utterly false. This video does not show how "money is created in market based economies" it shows how money is made in modern economies. Fractional reserve banking systems literally cannot exist outside of the power of the State. That is not an opinion
This video is completely wrong. FRACTIONAL RESERVE BANKING refers to CREDIT TO THE BANK and not CREDIT FROM THE BANK. Misinformation marches on.
r u likening kahn's videos to KKK videos? Saying the gold standard alone isn't the answer is not logically the same as saying the existing system is the right answer. Logic.
@Khan Academy, You realise banks dont lend out reserves right? for somehow how understands accounting i dont understand how you dont understand this....
FRACTIONAL RESERVE BANKING is NOT how banks create money. The correct process is the exchange of a promissory note for endogenous digital money in a specially created transaction account.
I call BS. I think you got enough comments pointing out how embarrassingly wrong you were on several points and realized you had to redo the whole lecture.
Money is not real.
-Andrew Tate
This is "interesting" hah